Someone recently pointed me to this blog, and it spurred my to go ahead and write this one, which I had been delaying writing until I had more time. For those of you interested mostly in startups/entrepreneurship, you may want to skip the first part, since it’s mostly me prancing around on my high horse.

Raising Taxes

As it stands, there’s this continuous debate over raising taxes and cutting spending. Being fairly conservative (of the Libertarian type), one would guess that I’d probably be against raising taxes. Sadly, this is not the case at all. Even though I think cutting spending is the number one thing that should be done, I think taxes should be raised. On. Everyone. Why?

Well, the reality is, cutting spending and raising revenue (including by raising taxes) will be more effective than either one alone. There shouldn’t be this stupid trade off between spending cuts and raising taxes. The trade offs should rather be on what to cut, and what to raise revenues with. In other words, when you start horse trading using spending cuts and tax breaks, you tend to end with neither (need I point to a specific example?). The more one side wants to do of one thing, the more the other side wants to do of the other, the further apart they get, and nothing gets resolved because everyone ends up being moronic.

But why raise taxes on EVERYONE? Punishment. Pure and simple. The American people got us into this mess, and so the American people need to pay the price. The debt increased because we voted idiots into office (and this is not singling anyone out, just about everyone elected for a long time have been certifiably stupid), and so now we have to pay the price. You know, cause and effect.

How much? Not much. I’d say just a percentage point or two for those who pay taxes, and perhaps reduce the refund by a similar amount for those who don’t pay taxes. Will it raise a whole lot of revenue? I have no idea, I can’t find a simple calculator that will let me figure out, but it’s mostly beside the point. Will the average person making $50k a year be hurt that much by losing less than $50 a month? No, not really. But the psychological impact is there, and hopefully they’ll realize what COULD happen if they don’t start electing people that are smarter than fifth graders.

On the other hand, Republicans are so stuck on this idea that increasing taxes on the wealthy is a horrible idea. I have yet to hear a single argument that passes the straight-face test. Less money for investment? Please. You give a person with assets of over a couple million dollars an extra million in cash, and what do you think they’ll do with it? Probably put it in the stock market. Which, contrary to was most seem to think, is generally going to be pretty worthless when it comes to having an impact on the economy. Sure, it might increase liquidity, but when you’re talking about buying stocks that are almost as liquid as cash, you’re not actually helping anything.

So how do you raise taxes and create economic growth?

In theory, it’s pretty simple. Small businesses and entrepreneurs are one of the major factors in economic growth. Not only do they spend a significant amount of money (instead of collecting it and passing on huge profits to executives), but they are also the engines of innovation. How do you use tax raises to help startups?

If you look at the blog I links to above, there are some suggestions that would cost money (and therefore need a source of revenue). But no one likes to raise taxes and claim the revenue will be used for a specific purpose…we all know that’s not what happens. So, how about targeted tax breaks? I have always been a fan of targeted tax breaks…or at least the concept of them. There are plenty of ways to screw them up, but I think if done correctly, they can have a very positive impact.

Recently, as it turns out, I have been pursuing, or at least researching, starting a business (now that I have spent three years throwing money into law school…makes total sense, right?). Naturally, at some point, I started thinking about how one might put those two together. I think my thought process was spurred by things like Y Combinator and CapitalFactory. There are many, many applicants, but only so much money and resources to go around. So how do you combine them?

Easy: Raise taxes on the rich, and give them the possibility to take advantage of offsetting tax deductions if they provide revenue for a true early stage startup, or a startup incubator/fund, like Y Combinator or CapitalFactory. In other words, if you raise taxes on everyone 1%, raise the taxes on high income earners 3%. But then allow them to deduct up to 3% of their income if they use it to support a startup. Or, some other combination that you think will work. If you don’t want to raise taxes at all (i.e., you disagree completely with the first part of this blog, which is understandable), don’t just indiscriminately cut taxes, use the prospect of lower taxes to DO SOMETHING GOOD. Hell, offer up to a 2 or 3% deduction to anyone who donates to a healthcare group that is dedicated to providing cheap healthcare to startups (a problem mentioned in the other blog). I don’t really care, but you get the point.

The reality is, higher income earners are in the best place to handle this kind of risk. Let’s imagine a person who brings in a million dollars a year. If they donate $30,000 to a startup, and then that startup goes belly up, they’re not impacted to a huge degree. But, on the other hand, if that startup creates the next new technology that increases the gas mileage of cars by 20%, they’ve contributed to a great advancement that has benefitted society (and them). And even if the company goes belly up, that’s investment has been injected into the economy to actually buy things or pay people; not thrown into the stock market where there’s going to be virtually no impact on the economy.

The other great thing about this idea? The investors are still investing, and still get the benefit of a good return should their investments pan out. For example, if that $30,000 turns out to be worth $300,000, you now get to tax $300,000 in income from a high income earner, creating more revenue, while encouraging MORE money to be spent on MORE startups. You end up encouraging the people who are more likely to be able to handle higher risks to invest less conservatively and put their money out there in an effort to generate a greater return not just for themselves, but for society. And this can be combined with other ideas, like providing tax breaks directly to startups.

It should be noted that this is similar to what exists (or did exist, or was proposed, I don’t remember), where when one sold stock in a company that qualified as a small business or the like, the income could be deducted or something like that. The main difference here is instead of encouraging the selling of a position in which you might already be invested in (or making it a better time to get OUT of an investment), you’re encouraging people to actually INVEST. Allowing a deduction on selling a stake in a company doesn’t really do that, but at the same time, that same type of program can be used to complement a program like I am advocating.

I have spent some time thinking about this, but for the most part, this is stuff outside of my expertise, so I welcome any comments on the topic!